U.S. Default Rate Falls to 2.6% in Q3 – Moody’s

By Michael Aneiro

My cover story in this week’s Barron’s magazine discusses how interest-rate risk has been far more pernicious than credit risk for bond investors this year, giving rise to so-called “unconstrained” investing strategies that seek to minimize interest-rate risk, often by taking on more credit risk. These things operate in cycles, but we’re still at a pretty low point for bond-market credit risk (until the U.S. government defaults, anyway), especially in the corporate bond market, where the default rate among speculative-grade U.S. companies fell to 2.6% in the third quarter from 2.9% in the second and 3.7% a year ago, Moody’s reports today.

Globally, the trailing 12-month speculative-grade default rate finished the third quarter at 2.8%, down from 2.9% in the second quarter and 3.3% in the same period last year. In Europe, the default rate came in at 3.3% in the third quarter, down from the second quarter’s 3.4% and 3.6% at this time last year. Moody’s forecasts that the global speculative-grade default rate will finish this year at 3.0%, before falling to 2.7% by the end of the third quarter next year. Across industries, Moody’s expects default rates to be highest in the Media: Advertising, Printing & Publishing sector in the US and the Retail sector in Europe in the next 12 months.

“Global corporate defaults continue at their recent pace below the historical average,” says Albert Metz, managing director of Moody’s credit policy research, in a statement. “Our central scenario assumes an orderly resolution of the US budget discussions, and under that scenario we expect corporate default rates to remain relatively stable for the next year.”

Moody’s global distressed index, which measures the percentage of high-yield issuers whose debt is trading at distressed levels, came in at 8.6% in the third quarter, down from 9.1% in the second. At this time last year, the index was a noticeably higher 17.0%.

Moody’s also said the US leveraged loan default rate ended the third quarter at 2.5%, up from 2.3% in the second quarter but down from 2.8% a year ago.

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